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Home >Money >Personal Finance >Tax on EPF interest proposed in Budget 2021: What it means for you

Finance minister Nirmala Sitharaman announced in Budget 2021 that interest on employee contributions to provident fund of over 2.5 lakh per annum would be taxed, starting from 1 April. "In order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of 2.5 lakh," Sitharaman said in her Budget 2021 speech.

"Under the existing tax provisions, interest received/accrued from employee’s provident fund (EPF) is exempt from tax. It is proposed that the interest earned on the EPF contributions (only employee contribution) above 2.5 lakh a year will now be taxable. This could potentially impact employees in high income bracket or employees making large voluntary employee provident fund contributions," said Parizad Sirwalla, partner and head, global mobility services- Tax, KPMG in India.

Key things to know about this new rule

1) Up to 2.5 lakh has been kept as the deposit limit for which interest is tax exempt, finance minister said.

2) The move is aimed at taxing high-value depositors in the Employees Provident Fund. At least 12% of an employee's basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12%. Anyone who earns more than 20.83 lakh a year will attract his or her interest on EPF contribution being taxed.

3) "If employees’ contribution to provident fund on or after 1 April 2021 exceeds 2.5 lakh in any year, interest earned on contribution over 2.5 lakh shall be taxable. It may be noted that the new provision only takes into account employees’ contribution and not the total contribution to the fund during any year. This will have a limited impact specifically on the high-income salaried individuals," said Gaurav Saraf, partner, VPTP & Co.

4) "We are not reducing any workers right. But at the same time, getting tax exemption and 8% rate of interest for somebody who puts 1 crore into the account, we thought is may be not correct. And therefore we have put the ceiling," finance minister said.

5) The big-ticket money which comes into the fund and gets tax benefit as well as assured about 8% returns that would come under the tax ambit, finance minister said.

"You have huge amounts, some to the extent of 1 crore, being put into this account each month. For somebody who puts 1 crore each month into this fund, what would be his salary? So for him to get tax concession and 8% return we thought is probably not comparable with an employee with 2 lakh who puts that money, gets tax concession and gets 8 per cent return. That person would still be allowed to put in money, but of course with a ceiling of 2.5 lakh," Sitharaman explained.

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